Trump tariff rumour-mill drives the dollar ever higher

CNN on Wednesday reported that Trump is considering declaring a national economic emergency to justify raising tariffs on a range of countries, including US allies as well as rivals.

The declaration would allow Trump to construct a new tariff program by using the International Economic Emergency Powers Act (IEEPA), which authorises a president to manage imports during a national emergency.

Markets responded to the CNN report immediately, with the yield on the benchmark 10-year U.S. Treasury note hitting 4.73% on Wednesday, its highest since April last year. The dollar gained against most currencies, with the EUR/USD falling below 1.028, just shy of the 2-year low it hit last week. The DXY index hit 109.37 in early morning trading today, its highest level in 2 years.

The GBP/USD also tanked, falling below 1.22580 this morning, its weakest since November 2023. The pound is also under pressure from falling investor confidence, triggering a sell-off in British government bonds.

Emerging market currencies were also hit hard, with the USD/ZAR almost breaking the 19.00000 level before falling back.

Citing unnamed sources, CNN reported that:

“Trump… has a fondness for the [IEEPA], since it grants wide-ranging jurisdiction over how tariffs are implemented without strict requirements to prove the tariffs are needed on national security grounds.”

Whether Trump follows through on this leak to the press remains to be seen. Analysts noted that in the case of the currency markets, we’re in a strange situation where the threat of action rather than the action itself is driving volatility.

Kieran Williams, head of Asia FX at InTouch Capital Markets said:

“Trump’s shifting narrative on tariffs has undoubtedly had an effect on USD. It seems this capriciousness is something markets will have to adapt to over the coming four years. While tariff talk is likely to support USD in the short term, they also introduce complexities with unknown implications.”

Until Trump’s inauguration, and most likely beyond, expect further market volatility. Between his fondness for policy via social media and the press leaks from his team, traders will need to be on their toes.  

Elsewhere today, the Chinese government moved to shore up the renminbi, also a target for speculators following the IEEPA rumour. The People’s Bank of China said it would sell Rmb60bn ($8.2bn) of bills in Hong Kong in January, its largest single sale since auctions began in the territory in 2018.

In recent days, the renminbi has weakened past Rmb7.33 a dollar, reaching its lowest level since September 2023. While most analysts expect the Chinese government to let the renminbi weaken over the course of 2025, policymakers are expected to keep tight control over the speed of depreciation.